An Interview with Ron Rowland

Today we bring you the latest installment in our series of interviews with the Dick Davis Digest contributors, in which Ron Rowland of Austin, Texas, shares his approach to the market and some advice for other investors. Ron’s newsletter, All Star Investor, has been named to the Hulbert Financial Digest’s investing newsletter Honor Roll for the past two years. The Honor Roll recognizes newsletters that have delivered above-average performance in both up and down markets.

Chloe Lutts: When did you start publishing All Star Investor? Why?

Ron Rowland: My first issue was dated December 31, 1990, and it was published under the name of The Sector Ace for the first four years. I was disenchanted with most of the publications on the market at that time due to lack of clarity in their recommendations and transparency in their reported results. I decided to start my own publication and vowed to have easy-to-follow models and unambiguous recommendations made in advance, while providing full accounting and transparency of performance results.

CL: So what’s the All Star Investor system?

RR: I call my approach Relative Strength Momentum, and it’s basically a trend-following system. It consists of ranking funds based on an intermediate-term price momentum calculation, and then trying to stay in the strongest groups. In the early years, my investment universe consisted of the sector funds from Fidelity and Invesco, and was therefore often referred to as a sector rotation system.

Over the years, I added style and international funds to the mix, providing some diversification away from just sector rotation. During the past 10 years I have been migrating from mutual funds to ETFs, and most recently introduced an ETF Dividend & Income Strategy that does not employ a momentum approach.

CL: Your newsletter has been named to the Hulbert Honor Roll, which recognizes newsletters with above-average performance in both up and down markets, for the last two years. I’m sure our readers would be interested to know how you maintain above-average performance during rough conditions. To what do you attribute the consistency of your success?

RR: I am neither a full-time bull nor a full-time bear. More importantly, I try to avoid making predictions about the market. I believe that people who are on the record for making a bullish or bearish prediction are likely to bias their recommendations to align with that prediction. So rather than wasting time trying to guess what the market might do, I try to focus on what it is doing, and try to align the models accordingly.

CL: On the subject of things that are a waste of time, what’s one big mistake you think too many investors make?

RR: One of the biggest mistakes that I think investors tend to make is locking in on a certain time frame, believing the conditions that existed then will last forever. Three years tends to be such a period for many investors.

In the late 1990s, following about three years of strong performance by technology and large cap growth stocks, many investors were convinced that tech and growth would be all you needed in the future. More recently, MLPs have had a great three-year run, and I’ve met investors who now want to put 100% of their holdings into MLPs.

CL: What do you see as the biggest challenge in the market right now?

RR: The near-zero interest rate environment for money market and short-term Treasury securities is an enormous challenge for those trying to live off of their nest egg. People that were planning to live off the interest are often the least prepared to understand the risks and trade-offs of the stock and bond markets.

CL: What’s one of your favorite ETFs or sectors to buy right now?

RR: Today, my largest positions are in Utilities. I have no idea how much longer that will be true. The current strength in the Utilities sector could last the remainder of the year or it could end next week. I think using ETFs makes enormous sense for most investors for many reasons: low expenses, portfolio efficiency, diversification, transparency, the list goes on. SPDR Select Sector Utilities (XLU) is an excellent way to capture the performance of this sector.

CL: Before you go, let us get to know you better—what else do you like to do besides investing?

RR: I enjoy old cars, map reading, competitive endeavors and a good glass of wine. I have found a way to combine the first three into one activity: antique automobile rallies, where I’m the navigator responsible for keeping us on course and on time. It wouldn’t be appropriate to be drinking wine during these events, but that gives me something to look forward to at the end of the day’s competition.

CL: Sounds fun! Thanks for talking to us, Ron.

Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Investment of the Week

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Market Update

From Cabot Emerging Markets Investor:

The post-election rally that has lifted U.S. markets is continuing, with major indexes hitting new highs. And while it’s puzzling that growth stocks are the laggards in this broad-based move, the reality is that markets are in great shape. Investors see the incoming president as pro-business, the economy is strong enough for the Fed to start raising interest rates and there is much less uncertainty about the future.

The situation in emerging markets, as reflected in the iShares Emerging Markets Fund (EEM), is also strengthening. EEM has been recovering since November 15, and is now sitting above its lower (25-day) moving average. Next week, if nothing unexpected happens, the 25-day average will scrub off the effects of the three-day washout that ran from November 9 to November 11 and the average will turn up, giving us a new buy signal. It’s tempting to jump the gun a little, but we have seen too many market reversals and volatility for that. So we will just note that investors are regaining their taste for emerging market stocks, which is a good thing.

Markets all traded up slightly today, with the Nasdaq leading the way for a change. At the close, the Dow was up 65 points (0.33%), the S&P 500 rose 4.8 points (0.22%) and the Nasdaq climbed 24 points (0.44%). The iShares MSCI Emerging Markets ETF (EEM) was up 0.16 points, which is a gain of 0.44%.

Alert

Many top earnings winners pulled back during the two-day Brexit selloff. I want to initiate a bullish position in Applied Materials which stood out after
blowing away earnings estimates. While I like the stock, I believe that there may be limited upside in most stocks, so I want to initiate a buy-write,
which sells expensive options.

To execute this trade, you need to:
Buy AMAT Stock,
Sell to Open the August 23 Calls.

As is always the case, you can sell one call for every 100 shares of stock you buy. Or five calls for every 500 shares you purchase.

For example, you could buy AMAT stock at 23 and sell August 23 Calls for 1.00 (the math behind this net price is 23 minus 1 equals 22).
I expect you will get a better price than I'm recommending.

The most you can make on this trade is $1.00, a yield of 4.54% in just over a month if AMAT closes above 23 on August expiration.

If AMAT is unchanged on August expiration, we will have created a yield of 4.54%.

Breakeven on this trade is 22.

The most you can lose on this trade is $2200 per buy-write if AMAT were to go to zero.

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